Returns on Capital Paint A Bright Future For Jiangsu Bojun Industrial Technology (SZSE:300926)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at the ROCE trend of Jiangsu Bojun Industrial Technology (SZSE:300926) we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Jiangsu Bojun Industrial Technology, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.22 = CN¥655m ÷ (CN¥6.3b - CN¥3.3b) (Based on the trailing twelve months to September 2024).

Thus, Jiangsu Bojun Industrial Technology has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Auto Components industry average of 7.0%.

See our latest analysis for Jiangsu Bojun Industrial Technology

Above you can see how the current ROCE for Jiangsu Bojun Industrial Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Jiangsu Bojun Industrial Technology for free.

What The Trend Of ROCE Can Tell Us

We like the trends that we're seeing from Jiangsu Bojun Industrial Technology. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 22%. Basically the business is earning more per dollar of capital invested and in addition to that, 461% more capital is being employed now too. So we're very much inspired by what we're seeing at Jiangsu Bojun Industrial Technology thanks to its ability to profitably reinvest capital.

On a separate but related note, it's important to know that Jiangsu Bojun Industrial Technology has a current liabilities to total assets ratio of 53%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

In summary, it's great to see that Jiangsu Bojun Industrial Technology can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And a remarkable 129% total return over the last three years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

Like most companies, Jiangsu Bojun Industrial Technology does come with some risks, and we've found 2 warning signs that you should be aware of.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.